Fed Governors Fret over Negative Feedback Loop

The economy may be poised to get from bad to worse.

According to many of the reports from the Federal Reserve's Board of Governors meeting in Jackson Hole, WY last week, many of the governors are increasingly worried about the likelihood that we are entering into a negative feedback loop.  Frederic Mishkin refers to this as adverse feedback loop, but it is the same thing.

Here is what may be happening.

Tightening credit standards, at present due to loses and mark-downs in the banking system (and in the future potentially due as well to regulation) mean that credit becomes less available.  Not only can people not borrow to buy new houses or new cars or whatever, but companies cannot get the credit that they need to expand their business.  As a result, these investments and purchases are not undertaken, and the economy incurs knock-on losses and declines. 

Concern is now rising over the negative feedback loop (especially given the absence of any sign that we are anywhere near the bottom in this housing recession) and realization that the entire worldwide economy, and not just the US economy, are now slowing.   This double wammy we may or may not through the economy into a recession or a depression, but it is certain to give us a long and profoundly difficult bear market.


Jason Rodgers
Jason Rodgers: Jason Rodgers was an experienced research analyst for a major bank prior to retiring to run his own investment consultancy in beautiful Lihue, Hawaii. Jason contributed articles to BestCashCow from 2008 to 2014.

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  • Sam Cass

    August 26, 2008

    I can't believe they are talking about this. This seems like economics 101. Nothing in the the world can be done until the excesses of the past 10 years have been squeezed out of the system. It's possible we will also overshoot in terms of a correction but that's the way markets work. Instead of griping about it, smart investors will horde their resources, wait for a bottom, and be prepared to go wild when things start to improve.

    When do we hit the bottom? When all anyone can talk about is how bad it is and when the failing economy appears on Time magazine news covers twice in a two month period.

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